Oil and Natural Gas


Dear Senator Murkowski.

I’m writing just to let you know how proud I am of you.  Maybe pride isn’t the right word here, but you are doing what I hope I would do in the same circumstances.  You are following your own light.  You are speaking your truth.  You had the courage, as some others lacked, to stay in the fight.  And you won.  Hallelujah.

Your win is an incredible gift to a country that so needs someone who can stand, even if just a little, on the outside of the duopolistic system that’s evolved; someone who isn’t blinded by party loyalty and is thus able to see things as they are.  America isn’t predominantly right wing or left wing, but center right and center left.  And you and I both know that the solutions to most of America’s most serious problems can be found in that place, where rigid ideology can take a back seat to problem-solving.

Let’s take climate change.  You are right, of course, that there is scientific consensus that the burning of fossil fuels is impacting the planet’s climate.  It may not be the calamity some are predicting, but then again it could be.  We just don’t know that yet.  What is clear is the activities of mankind are having an impact and something needs to be done.  I applaud you for not only recognizing this but having been willing to act.  It was a courageous and principled stand.

We both also know that, fantasies aside, the country is going to be using massive quantities of fossil fuels for decades to come.  With a balance of trade deficit as high as it is and with U.S. environmental standards in the world’s top tier, we need to be producing as much of those fossil fuels as possible here at home – oil and natural gas.  We can do it better than most countries and keep American jobs and dollars in America.  In this tough economic environment what better stimulus than putting Americans to work producing American resources.  Every barrel we don’t produce here must come from somewhere else.  We must also put an end to the delusion that hydraulic fracturing – a process critical to producing world class quantities of natural gas in this country – is a a threat to America’s water resources.  This has been a sub-myth of the myth that if we make it harder to produce fossil fuels in America it will move us to the renewable energy future faster.  We both know it won’t.  Yet we know that renewable energy future is important and is deserving of support.

In closing let me again reiterate my pride in you.  Perhaps part of this pride is that I first met you when you were a state legislator and you attended a program I was giving on the subject of “states and oil and natural gas”.  We talked and I’ve watched and been mightily impressed by your career ever since.  You have been a great Senator and I predict that now you can be an even greater Senator should you be willing to carry your hard-won independence into the U.S. Senate and speak truth to duopolistic power.  I recognize that you may need to bargain away some of that independence in order to again become Ranking Member of the Senate Energy and Natural Resources Committee, but you should nonetheless cherish the independent mantle you’ve earned.  You can become what Senator McCain never really was but claimed to be.  The Senate and indeed America needs a true maverick voice.

I hope you can be that voice.  You will have my full support.

Kevin Bliss

Washington, DC

There is a must-read opinion column in the Washington Post this morning by Robert J. Samuelson.  It’s entitled The Bias Against Oil and Gas.  It is spot-on.

Energy is critical to the healthy functioning of the U.S. economy.  It is, therefore, a crucially important issue for President Obama to get right–to address in a rational manner.  The point here is that Obama’s “bias” against oil and natural gas will have consequences.  These consequences include failure of his “energy policy” and quite possibly failure of his economic policy upon which so much, even rhetorically, rides on the over-estimated potential of renewable energy.  Worse yet, it means that Republicans may be handed an issue, when oil prices once again soar (and oil prices will again soar, trust me), that gets them re-elected before they deserve to be.  The loser will be the country.

The point here, and I am certain the prime motivation behind Mr. Samuelson penning the piece he did, is that there is time to correct course.  There is still time to get it right.

There are a couple of reasons in particular why someone as brilliant as Mr. Obama has gotten this issue so terribly wrong.   One, and at the top of my list, is that our president doesn’t really understand energy policy.  This is understandable.  Although Illinois is an oil and natural gas producing state, it is not Texas.  While once a significant producer, Illinois’ production has declined and oil’s economic significance to the state is limited.  Additionally, spending a career in Chicago and so little time as a Senator representing the entire state, President Obama has had little opportunity to be educated.  Thus he, like most Americans, has learned about energy not by first hand experience but by what he’s been informed about energy, and particularly about oil and natural gas, by popular culture.  Popular culture tells us that oil is dirty and is bad for people and the planet and the way to move ahead is to not drill any more dirty oil wells.  It tells us that solar and wind are clean and abundant and we must only try harder and that will be our future.  As nice as this sounds, however, it is myth.

Another reason Obama has this wrong is alluded to in Mr. Samuelson’s column.  It is the power of the environmental groups and the fact, quoting Mr. Samuelson that “[t]o many environmentalists, expanding fossil fuel production is a cardinal sin.”  Given that environmental groups are an important contituency of the Democratic Party, Democrats are loathe to challenge its orthodoxy.  Yet a rational energy and economic policy demands a overt challenge.  Unless challenged it will lead the country down a path that does not lead to energy self-sufficiency.  It will lead to even more oil imports in the years ahead.

Expanding domestic oil production is not inconsistent with our country’s, and the world’s need, to limit the burning of fossil fuels in the years ahead.  That need is properly addressed through legislation that will begin to put a cost on the burning of fossil fuels so as to discourage its use.  In the meantime, the goal of this country needs to be moving as much production as it feasibly can back to this country.  We must never lose sight that every barrel not produced at home will otherwise have to be imported.  And every barrel of oil imported amounts to hundreds of billions of dollars and thousands of jobs going overseas.

Energy and economic policy will only work if built on a rational foundation.  It is time to re-lay the footings and begin to construct an energy policy that has architectural grounding.   

 

I have very few complaints about our President and the job he’s been doing.  To date, Mr. Obama, while perhaps overreaching at times, has managed to hit the political sweet spot more often than not.  He is, by and large, managing to do the right thing.  His high polling numbers reflect this.  Where he has completely missed the boat, however, is energy policy.  What he is proposing for the country will simply not work.  What the Obama administration has proposed is fantasy, dangerous fantasy.  My critique here is not to declare opposition but to advocate in favor of a course correction.  What’s been proposed is good, indeed, admirable, but it is not sufficient to accomplish the administration’s stated goals.

A couple of recent Op-eds are useful in helping to explain why what Obama is proposing will not work as represented.  The first appeared last week in the Washington Post.  Authored by James Schlesinger and Robert L. Hirsch, it is entitled Getting Real on Wind and Solar.  The second was in this morning’s Washington Post.  It is Robert J. Samuelson’s Selling The Green Economy

As I’ve said many times before on this blog, what the country needs to do, in addition to that which has been advocated by Mr. Obama in incentivizing and encouraging the development of new and clean energy technologies, is to recognize the inevitability of fossil fuels in our economy for the next two decades.  This is cold, hard reality.  Given this reality, the focus needs to be producing more oil and particularly cleaner burning natural gas, here on the North American continent.  For U.S. energy policy to finally succeed the country must face down the twin enemies of overseas imports of oil (this because our transportation sector is so heavily dependent on oil – 96%) and carbon emissions.  Increasing domestic production of both oil and natural gas, while not meeting the second goal–decreasing carbon emissions–, is our only viable alternative if we are to succeed with goal number one — decreasing foreign imports.  It will be through our climate change policy that we reduce emissions either through implementation of a cap and trade system or a carbon tax.  This will be what reduces our use of fossil fuels.  In the meantime, moving more energy production onshore in North America not only increases domestic energy security, it gives our economy a gigantic boost in the form of dollars circulating in America instead of being shipped abroad.  We can no longer afford the money drain.

Environmental groups and their followers need to lose the certainty that supporting domestic production, offshore and onshore, is yielding to the enemy.  It isn’t.  It is facing the fact that the country can no longer afford foreign imports, which is and has been for years the default when domestic production is stymied.  Instead, we need to bring the production home and focus on reducing carbon emissions through enactment of workable climate change legislation.  It can work.  We simply need to make it national policy. 

To say I was disappointed in President Obama last week is an understatement.  I had hoped that his promise of change meant a more sincere effort to develop public policy rationally and less ideologically.  I’d had enough of ideological driven policy under President Bush.  I hoped for more under President Obama.  I was wrong, because although our President and government changed, our system dominated by two parties, which engage in mortal combat for power, did not change.  That means that party ideology matters more than rational solutions to America’s problems.  Also not changing was the system’s toleration for policy driven by interest groups within the parties.  The two are highly related, unfortunately.  With appeasement of interest groups comes acceptance of their prescription for changes in public policy, notwithstanding what might be rational or best for the country. 

Vice-President Cheney got no end of criticism for formulating over a number of months a national energy strategy without consulting with environmental groups.  Now, last week we have President Obama announcing a national energy strategy within 5 weeks of his taking office.  There was no pretense of process for forming a new national energy strategy, he and his team just did it.  I can also assure you that as many industry advocates had a share in development of Obama’s plan as there were environmentalists developing Cheney’s.  There have been no screams of outcry this time though.  I guess it’s because environmentalists wear white hats and “big oil” black hats and the former is inherently about protecting the public interest and the other is all about exploiting it for profit.

This is the “change” that Obama has brought to Washington–not change in the way policy is developed but a change in the insiders who are consulted and the corresponding results.  The country is now unconcerned with domestic oil and natural gas development, as was a focus of Bush-Cheney policy, it is now concerned with promoting renewable fuels.  It’s not the change we needed.

I feel very confident in saying that the energy plan announced last week by President Obama won’t work.  Of course, alteration may yet take place that would alleviate some of my concerns, but for now the energy course the President appears to have set is one that’s deeply flawed.  It’s pushing string.  It’s picking winners and losers.  It’s developing a course of action based on an incomplete understanding of the problem.  The result is a plan of action that fulfills special interest fantasies but is almost totally disconnected with reality.  

My prediction is that if Obama pursues the energy policy he announced by virtue of his budget and address to the nation last week domestic oil and natural gas development will wither.  Yes, we will develop more renewable sources of energy, perhaps even matching the President’s goal of doubling the amount of supply from such sources.  Yes, too, we might put more efficient automobiles on the highway and use less gasoline.  But, these steps will not significantly reverse the country’s dependence upon foreign oil which causes so many American dollars, and thus American jobs, to flow overseas.  His policy, in fact, exacerbates the problem by withdrawing all tax incentives for domestic production and, indeed, raising the tax burden.  Actions by Secretary of the Interior Salazar to reduce access to public lands for oil and natural gas development also make things worse.  This means we’ll be producing even less than the inadequate amount produced domestically during the Bush administration.  This can only mean increased importation of oil since the other steps we’re taking are completely inadequate to themselves stem that tide.  The fact is that for the Bush policy of increasing to domestic production to have worked to its potential, the country needed to have opened the Arctic National Wildlife Refuge and restricted offshore lands to development.   The Democrats (and a few Northeast Republicans) saw to it that that didn’t happen. 

What the country needs is a “doing it all” approach to energy policy.  It needs to raise gasoline taxes in a revenue neutral way to send a powerful message that oil is not cheap.  Then it needs to encourage domestic production and the incentivization of renewable energy.  It’s yes to it all.  A significant problem is the course of action I’m advocating is that it would be unpopular with environmental groups and President Obama has accepted their worldview by default.  Without ever having been presented the complete picture, our President has apparently made his decisions. 

I had hoped that General Jones would have been at the table in this debate, given his familiarity with the national security consequences of imported oil.  It seems, however, that he wasn’t.  He’s apparently still settling into the job and visiting foreign lands.  He may be as shocked as anyone by the abrupt early announcement of so significant a policy.  My hope for the country is that this debate is not yet over and that maybe General Jones may yet be able to have some influence. 

As I indicated last week, if President Obama’s proposals for health care and education reform are as well thought out as his energy policy, the country is in trouble.  Maybe Obama knows more about the other two, but he clearly knows little about energy.  And the failure here will be not just America’s ability to become a little less dependent upon foreign oil, it could be a political time bomb giving the Republicans a volatile issue just in time for the next elections (2010 and 2012).  If natural gas and oil prices rise as they most certainly will as the world economy revives, the rise in price will be as stunning and as economically shattering as were the price rises of last year.  A public that is just, hopefully, getting its feet back on the ground economically will not be pleased with high energy prices taking money out their wallet.  It will also not be pleased by Obama’s insufficient efforts to increase domestic supply.  It is entirely plausible that a Republican Party that has not yet learned its lessons will be back in power in the House or the Senate or even the White House before the Party is ready.

Let me close with one final observation on the “change” that Obama has apparently brought to Washington.  I hoped for change where the President could sit down and work out differences with opposing interests and, in dialectic fashion, advance a rational agenda.  Instead, you have the American President taunting industry lobbyists in the last few days to bring on the “fight”.  Mr. President, this shouldn’t be about fighting and competition for supremacy, it should be about crafting a policy that works for America.  Our first indication that we’re on the right road will be when both industry AND the environmental groups are equally unhappy.  Clearly that’s not the case and what you’re saying to me is that you’ve made your decision, that you know all that you need to know, and that you’re not willing to listen, all a mere five weeks out of the gate.  Disappointing indeed.

First the speech, now the budget.  We’re beginning to see that Obama is no centrist after all.  His agenda is distinctly to the left of left of center and he’s not an incrementalist.  He’s setting about to change America radically and fast.

America needs change.  The problem is that our choice for political leadership in this country is between a hyperactive Democratic Party with a leftist agenda and tired and worn out Republican Party with a right wing, moralistic, and arguable overly-free market agenda.  The fact remains that there exists a huge amount of real estate between the two extremes, real estate upon which I would argue America would be better building its future home the than real estate being proposed by the two American parties.  And today, one party is in control and it is on their real estate that the we’re proposing to build.

What concerns me the most about Obama’s proposals is the relative lack of thought and preparation that is behind them.  He has produced all of this in just one month!  Echoing what David Brooks observes in his column in the New York Times today (The Uncertain Trumpet) Obama is merely laying out a conceptual framework for the future but he is leaving it to others to work out the details.  That’s dangerous when the others are Congressional leadership dominated by Nancy Pelosi Democrats.  I am concerned that facts (rationality) will play too small a role and leftist ideology to large a role as laws are passed and programs are initiated to build on the Obama conceptual framework.  Likening policy to a road map, it needs to be based upon reality in order to deliver us to the desired destination.  If based on fantasy, it is unlikely to lead us to where we want to go.  Reality and rationality must trump shallow and overly-idealistic ideology.  

I will keep returning to energy as an example as, substantively, I know it best.  On energy, the budget is very “command and control” and sets about picking winners and losers.  One loser appears to be all things “oil and gas”.  A first glimpse at Obama’s energy budget reveals that he proposes elimination of almost every incentive for domestic oil and natural gas production on the books.  It also appears to eliminate all oil and natural gas research and development.  This is not wise when the American economy is dependent upon foreign oil to fuel an economy that will not even under the most optimistic scenarios be able to wean itself from oil for transportation for decades.  Complex issues require complex solutions.  It doesn’t appear we’re going to get them from Obama.  He’s too busy painting colorful conceptual murals of the America he envisions and leaving it to others to try to turn that fantasy into reality.

In Obama’s defense, I suspect most of the “oil and gas” policy outlined in the budget proposal yesterday was the less the process of an Obama policy process than it was the creation of green eye shade types at the Office of Management and Budget (OMB) who’ve fought oil and natural gas for years.  Apparently President Reagan’s first budget did almost the same thing.  

For today, at least, that is going to be the extent of my criticism of President Obama.  As I’ve indicated, I believe the country needs change.  Of that I have no doubt.  But this much change so fast concerns me enormously.  It risks losing rationality in the process and without that in the mix, we will have nothing to show except enormously expanded American debt.  Let me now recommend some of the better and/or most informative pieces that I encountered this morning in my journey through today’s Washington Post and New York Times. 

I think the best sources of basic information this morning on the President’s budget proposal are the “analysis” pieces that can be found in both the Post and the Times.  The Post’s piece by Dan Balz is entitled Ambitious Blueprint a Big Risk The President is Willing to Take.  The Times’ “news analysis” piece is by John Harwood and is entitled Political Skills Put to the Test.  On the opinion front, representing left, right and center, I recommend three: Climate of Change by Paul Krugman; The Obamaist Manifesto by Charles Krauthammer; and the David Brooks column referenced and linked above.

As I indicated above, I am going to withhold criticism and give Obama a chance.  There will be plenty of time to oppose, if that is what is ultimately called for, as the conceptual frameworks become blueprints become law.  

Ambitious.  That about sums up our President’s address to the nation last night.  Obama is promising the country almost everything.  The problem is, everything is pretty hard to deliver upon.  Does this mean that if we don’t end up getting “everything” that he has failed?  Might it not have been better to scale back the promises, if not the intent, and work on just a few things.  My concern here is heightened by the fact that the risks are so great.

A good “news analysis” of President Obama’s speech last night is provided by Peter Baker in the New York Times this morning.  It’s entitled In Time of Crisis, Urging Bold Action and Big Ideas.  I am personally encouraged we have a leader of the apparent caliber and self-confidence of Barack Obama, but I’m concerned that he can pull it off. 

My concerns are heightened by his ambitious energy goals.  Knowing what I know about energy I am concerned that his other goals are equally ungrounded in reality.  Obama talks about a renewable energy future but doesn’t acknowledge the critical role of the fossil present.  He talks about weaning ourselves from foreign oil but doesn’t discuss the pain it will take to get there.  When Obama promises to double our use of renewable energy that means going from 7% to 14%.  Good, but not enough to wean us from foreign oil, especially when just 7% of renewable energy goes to transportation today.  Today the country is 96% reliant on oil for transportation, the majority of that imported.  The remainder comes from natural gas (2%) and renewables (2%).  A real solution to dependence upon foreign oil will require increased domestic production of oil and natural gas.  To achieve this Obama will have to face down the liberals of his party and environmental groups and convince them that the path to both energy independence and a renewable future involves medium-term dependence on American-produced fossil fuels.  This is the reality.  The other is fantasy.  Will Obama get it right?  I have hope but significant doubts.  Our present system will make it very difficult for him to buck the environmental left on this.  If he doesn’t buck it, he cannot achieve energy independence and the country loses.  If he does buck it, he risks lose a key constituency and significant Congressional support.  Watch how this develops.  If we don’t open the offshore to significant new development we’re operating in fantasy land and Obama’s stated energy goals are likewise fantasy and will fall short.  If he does it, maybe he’s indeed got what it takes.

In the meantime we watch, and hope.   

 

I’m not very hopeful on the energy policy front that President Obama is going to be able to accomplish anything significantly new.  What the country needs is an aggressive “do-it-all” approach to energy.  It would be a policy in which every part of the American energy industry is encouraged to expand and grow with the overlay of needing to move the ball forward, significantly, on mitigating climate change.  But, alas, it doesn’t appear that we’ll be moving into this sphere under President Obama.  I hope I’m wrong, but the early indicators are that we’ll merely emphasize renewables, punish domestic oil and natural gas, and let imports continue to rise (assuming the economy ever rebounds) to fill the gap between what this country can produce and what it needs.

Disappointing but entirely expected from a Democrat Secretary of Interior was the recent voiding of drilling leases on public lands.  The story can be found in the Washington Post and the New York Times.  While this could just be smart politics–cancellation pending review is smart and appeases environmentalist friends–and the end result could be re-leasing much, if not all, of the withdrawn land, don’t count on it.  It would be an unlikely result from a political party so dependent upon its environmentalist constituency.  There is no question that some land needs to be held back from drilling.  We don’t need to drill every square inch of the country, but make no mistake, we need significant domestic drilling to extricate ourselves from our dependence upon foreign oil.  Most environmentalists will only be happy when we halt all domestic oil and gas operations.  It’s unrealistic, but who cares about realism.  This is environmental politics. 

What the country needs to do is encourage domestic drilling in every way it can while at the same time sending a strong signal to the economy, through a gas tax or something similar, that use of oil is very costly.  Senator Richard G. Lugar recently called for imposition of a gas tax in a revenue-neutral way “to treat our oil addiction.”  His Op-ed in the February 1 Washington Post is entitled Raise the Gas Tax.  I’ve advocated for such previously on this weblog (here and here).  It would be sound public policy that in addition to discouraging the use of oil for transportation (our biggest use of oil) would encourage conservation of energy and the growth of renewable and alternative energy.  Win, win, win.  Is it likely to happen?  No.  Politicians are loathe to do unpopular things, even if revenue neutral.

There was also a recent story indicating that green energy has taken a big hit as a result of the declining economy.  This is as tragic as discouraging domestic production of oil and natural gas.  We must do it all.  For the story on how the financial crisis is hurting wind and solar energy, and why the stimulus provisions in this regard will be helpful to the industries, see Dark Days for Green Energy from the February 4 New York Times.

It would not be hard to put together an energy policy that makes everyone happy.  The problem is that such a policy would also make some sad, for the country would have to do some things it wouldn’t do in an ideal world (drill offshore, produce more onshore oil and natural gas, burn more coal, build more nuclear plants, develop wind energy off of Cape Cod).  Doing the right thing is never easy, but it’s the path to progress. 

I was confronted with two stories yesterday, seemingly unrelated.  One was about efforts by natural gas exporting countries to create a formal organization that many fear will morph into a natural gas cartel similar to the OPEC oil cartel.  The other was a story sent to me by a friend about the rescue of a humpback whale off of the California coast where at the conclusion of the rescue the whale went to each rescuer and nudged them as if to say thank you.  It is a moving story that reminds us of our responsibility to preserve other forms of life, some perhaps of very high intelligence.  The latter story was from the San Francisco Chronicle dated December 14, 2005 and entitled Daring rescue of whale off Farallones

Receiving both of these stories comes as I’m finally reading a book that I’ve had on my bookshelf for a year now.  I’d seen it on a list last year at this time of the best books of 2007.  It’s entitled The Unnatural History of the Seaand authored by Callum Roberts.

The book tells the story of man’s centuries old abuse of our oceans and its creatures.  What we’re dealing with today is the result of centuries of overfishing and the complete insensitivity of mankind to the environment.  Reading its chapters on the Chesapeake Bay, including the Potomac River, was particularly interesting to me as I live but few minutes walk from the Potomac River in Washington, DC.  The book describes the Chesapeake Bay estuary when it was discovered as overflowing with fish and and other wildlife.  Observing it today one would suppose that nothing lives within its waters, though a few fishermen can be found angling along the banks despite the warnings not to eat more than certain quantities of fish due to the presence of heavy metals.  One certainly doesn’t see whales (including Killer Whales) or porpoises or fish so thick you could pluck them from the water.

That we must take better care of our waters seems very clear.  Living along the Chesapeake Bay estuary as I do and crossing it on the Chesapeake Bay Bridge dozens of times per year, I can think of few things that should be of a higher priority that cleaning up the bay and reestablishing a healthy fishery.  Yet, knowing what I know about offshore drilling, it wouldn’t faze me in the least to drill oil or gas wells into the bay.  I see the two things as completely unrelated.  My biggest concern with drilling would be with the visual impact and I would think that states would need to insist upon either directional drilling from shore (which can be done perfectly safely) or gas-only production from the waters themselves (as there would be no visual impact other than during the relatively short drilling phase).  This is what the Province of Ontario does in the Great Lakes.

Yet we in America, while we continue to drive our 4-wheel drive Suburbans to and from our homes built in suburbia in a manner that completely ignores the impact of runoff from our fertilized lawns on inland and coastal waters, refuse to consider drilling offshore.  It is completely illogical.  It is the kind of disconnect that we expect in an America that gets its information from soundbites rather than from serious inquiry.

This brings me back to the story that a number of countries that produce and export natural gas have created a formal organization that appears to be aimed at created an OPEC-like cartel for natural gas.  With the increase in the transport of liquified natural gas it is becoming more and more a world commodity.  As we in the United States build more import terminals we are at risk of becoming as economically dependent upon natural gas from abroad as we are on oil.

My very strongly held view is that we must first conserve, and secondly produce as much oil and natural gas at home before we import by sea any more oil or natural gas.  That we may soon have another cartel on our hands that aims to manipulate the supply and therefore the price of natural gas should be highly concerning.  It also means more petroleum products on more boats travelling into a ports, not an unrisky thing itself.

My conclusion in all of this is that President Obama has a unique opportunity to create a new energy policy in this country that is for the first time both rational and balanced.  Certainly a Democrat advocating offshore development will have far more credibility with the public than would any Republican becuase of the Democratic Party’s longstanding advocacy for the environment.  There doesn’t exist the suspicion that would exist with Republican leadership, however unjustified, that the decision is just about paying off campaign contributors.  For reasons including national security, the environment, and the economy, the country needs to expand its production of oil and natural gas at one and the same time that it expands development of alternative fuels and reduces the overall use of fossil-based fuels.  The only energy path forward is one that uses all of our energy resources as we transition to a completely new energy future.  For President Obama and the Democrats to squander this opportunity to at last put the country on the road to that rational energy future would be tragic.  There will never be a better time to get it right and it will not mean forsaking the environment.  It will, however, require saying no to irrationality and yes to progress.

When it comes to our environment, and especially our marine environment, we need to pay attention to the real causes of harm to that environment and the real risks of future harm.  Prudent oil and natural gas production incorporating the lasted technology has shown to be extremely safe and non-damaging to the marine environment.  I have toured production platforms in the North Sea and the California coast and know them to have, if anything, a positive impact on their immediate environment.  There will never be a better time than the present to get straight our goals, a clean environment and a sound energy future, and dispense with myths and untruths that muddy the waters of sound policy making. 

Over the decades that the Organization of Petroleum Exporting Countries (OPEC) has been in business, we’ve come to view them as a benign player on the world stage.  They are anything but.  We have forgotten, if we ever knew, that they are group of “outlaw” nations that engage in behavior that would be illegal in most countries, at least in the West.  This is because it is not legal in most Western nations to conspire to keep prices artificially high.  It’s called restraint of trade among other things.  It is the essence of OPEC. 

I’ve been watching and observing OPEC for most of my lifetime.  It was founded in 1965 when I was eleven.  In my college years, studying natural resources economics at university, I watched OPEC play a key role in the oil crisis of the 1970s.  I recall experts predicting that the price of oil would only continue to increase in the years ahead.  I was amused last year as oil prices rose to record levels that experts were predicting once again nothing but higher prices for oil on into the future.  My reaction this time was, ‘well maybe, but it would be a first’.  It would be a first because over the 30 years that I’ve been watching the oil business I’ve observed that while the behavior of OPEC in reducing supply can result in high prices for a time, the market always wins in the end.  Every time prices get too high for too long, new investments are made and new technologies are employed to develop oil fields that, but for the higher prices, would have been uneconomic.  The new oil flooding the market causes a massive decline in oil prices.  This in turn triggers OPEC to take measures to restrict supply so as to again drive up the price of oil.  

That is in essence what OPEC has done yet again this week.  As reported in yesterday’s New York Times in the story Further Cuts In Output By OPEC Are Likely, OPEC is preparing yet again to cut oil supply in an attempt to drive up the price of oil.  This is notwithstanding the “dire state of the global economy” as the New York Times story put it.  You see, this doesn’t matter to OPEC.  What matters is maximizing the return from their production.

When oil prices rise again, as they will do, OPEC will be only one of the reasons.  Another reason is that low oil prices will have meant that oil companies will have cut back on their investment in new production.  Another New York Times story explains this phenomena.  It’s entitled Big Oil Projects Put in Jeopardy by Fall in Prices.  At today’s prices (the Times reports New York oil futures at $43.60 a barrel on Tuesday), oil companies can’t invest in new production and still make money.  With no investment, supply will fall, and sooner or later, in concert with the actions of OPEC to reduce supply, equilibrium will once again be reached and then breached as demand once again outpaces supply and the price climbs.

For now, the world economy gets a break.  It will be awhile before the OPEC actions and the impact of declining investment in new production begin to show in the market in the form of higher prices.  The world economic slump and its impact on the demand for oil could prolong this period.  In the meantime, every month the price remains low is stimulus to the world economy for which we can be grateful.  Imagine how bad things would have been if the world were still paying last year’s prices for oil.         

The longer term problem is that the oil price yo-yo does no one any good.  Stability in oil prices would be a far better for the world’s economies over the long term.  Industries could plan and consumers could make decisions rationally.  Now, it is anyone’s guess especially as traders collude and world events throw uncertainty into the equation.  How could this situation be improved?

I’d argue that at least in America, an ever-increasing floor on the price of oil (in essence a tax on oil), would contribute to price stability.  It would help send a market signal to consumers that conservation of oil is a good thing.  It would send the signal to Detroit that more efficient cars are an economic necessity.  It would signal to all American energy producers–oil and natural gas production companies as well as solar, wind and geothermal companies–that investments made will be able to be recouped.  It would also begin to address our overuse of carbon-based fuels and begin to cut our emission of CO2 in the atmosphere even in advance of passage of complex cap-in-trade legislation.  If implemented so that all government revenues received from the tax were refunded to consumers, it would be largely tax neutral and should not negatively impact economic recovery, indeed it would assure that the recovery that takes place is smarter from an energy conservation perspective.  See my posting entitled A Floor on Oil Prices and its reference to an excellent Washington Post editorial on the subject. 

I’d argue that imposition of the tax (via setting a floor on the price of oil) along with a meaningful opening of U.S. offshore resources to development and a responsible policy of onshore leasing on federal lands in the west would insulate political Washington and particularly the Obama administration from the shock of higher oil and natural gas which can be expected to hit the U.S. economy just about the time of the next general election in two years.  It would be both smart politics and the right thing to do.  

Some of us are natural Democrats and some of us are natural Republicans. Some of us are neither.  I suggest that a natural Democrat or Republican is someone who is almost always in total agreement with the party and with all of its various alliances; it is someone who could sign the party’s platform every four years as a statement of personal belief.  I’ve never been that person.  There will always be a number of things with which I would disagree.  More importantly there are affiliations with which I could never agree.  In my case I am offended by the all-to-close relationship between the Republican Party and the Christian right.  I am likewise alienated by the seemingly borderless relationship between organized labor and the Democratic Party.  Sorry, but I like to think for myself.  If being a member of one of our parties means I have to check my views at the door, perhaps “Independent” is destined to be my permanent affiliation.

Echoing the point with which I began, for some people there’s no conflict at all.  They are perfectly comfortable as Democrats swearing fidelity to organized labor or as Republicans attempting to legislate morality.   Have at it folks, I’m glad you’re happy.  I suspect there are also others who might not necessarily agree with certain positions or affiliations but that nonetheless have decided to accept the bad with the good as a political necessity.  The same holds true for anyone elected to the U.S. House of Representatives or U.S. Senate.  If you don’t affiliate with one party or the other, you are nobody: you don’t get committee assignments, you don’t get earmarks, you don’t get squat.  Thus, were a true independent to have been elected a few weeks ago, he/she would have to choose between Nancy Pelosi or John Boehner for Speaker.  What a horrible choice.

This leads me to my real point today.  We have a nominee for Interior Secretary, Senator Ken Salazar of Colorado, who is a supposed centrist.  So far, so good.  But how centrist can you really be when a major tenet of your party is “environmentalism” and a very major constituency is the the environmental community.  It has been my experience that it is a rare Democrat that can say “no” to environmental groups.  Indeed, it is a rare Northeast Republican who can say “no” to environmental groups.  These groups have got too many supporters in too many Congressional districts who’ve been brainwashed into thinking that what’s right for the environment is what these groups pronounce is what’s right for the environment.  It is all but impossible for a Democrat or Northeast Republican to be able to say “no” to them.  They would be taking a big political risk to do so. 

So now we have Senator Salazar nominated to the position of Interior Secretary.  For more information on Senator Salazara and this appointment, read the Washington Post story today entitled Obama to Name Salazar As Secretary of Interior.  First, don’t get me wrong, this is an outstanding appointment, especially if one considers some of the other candidates that had been discussed.  Congressman Grijalva would have been a disaster.  With Senator Salazar we have someone, as I believe we would have had with John Berry, who will make a sincere effort to balance interests in administering an agency with one of the most difficult mandates of any in government.  He is someone, unlike Grijalva, who will say “no” to environmental groups.  My concern is it won’t be often enough.  It won’t be often enough because as a Democrat Salazar simply won’t have the option of saying “no” as often as he should.  He’ll say “yes, but” or “no, but” a lot.  Everything will be a compromise.

What will get shortchanged in this the country’s energy policy.  It’s my view that there is no other agency of the United States Government that has more influence on this country’s energy policy or, energy prices, than the Interior Department.  This is because it controls so much public land, onshore and offshore, upon which so much of this country’s natural resources reside.  The department’s decisions therefore have a huge impact on the country’s ability to produce its own oil and natural gas.  Environmental groups like to paint the choice that has to be made as between “appeasing oil and natural gas production company interests” vs. “protecting wildlife and the environment”.  That’s not it at all though.  Oil and gas interests are but vehicles for a much larger and more important public interest.  That is the country’s interest in securing a domestic oil and natural gas supply that reduces our dependence on oil produced in other parts of the globe.  For both national security and economic reasons the U.S. can no longer afford, not that it ever could, to import the quantities of oil that we are presently importing.  We just can’t do it any longer.  Thus, the real debate is between “the country’s need for producing oil and natural gas domestically” vs. “protecting wildlife and the environment”.  The line is fuzzier.  It is even fuzzier if you factor in issues such as the environemental risk taken every day as mega-tankers traverse the world’s oceans with cargo that at any moment could result in an environmental disaster of proportions heretofore not experienced, or the lack of environmental safeguards for oil and natural gas drilling in many parts of the world that are standard practice in the United States.  It’s fuzzier too when one considers the economic ramifications of $350-700 billion (depending upon the price of oil) leaving the country every year to pay for this imported oil.  Every decision Interior makes should be made as if there’s an representative from the National Security Council or the Treasury Department in the room as well to make sure those interests are adequately represented.

People will argue that I’m forgetting climate change in this debate.  I’m not.  It is all too real and has to be addressed.  It would be best addressed through a carbon tax that starts to put a premium on the burning of fossil fuels.  (A less transparent and much more complicated alternative to a carbon tax would be institution of a cap-and-trade system to limit carbon emissions into the atmosphere).  Applied to my argument above that we should be producing more oil and natural gas domestically and importing less oil from abroad, a carbon tax would mean that we would begin to discourage the overall use of oil and natural gas and concomitantly increase the overall use of alternative fuels (such as wind and solar).  The place not to engage in the battle between “oil and natural gas” vs. “alternative fuels” is in the field through denying access to public lands for oil and natural gas development.  That battle should be fought with tax policy at a macroeconomic level.  Fighting the battle locally, as environmental groups so like to do, only means, all things being equal, that the country will have to import more oil.  Every barrel of oil not produced in America is a barrel that will have to be imported.   

I want to also close with this observation.  The wildlife and conservation impacts of oil and natural gas development are widely overestimated by most people.  This is because people think of oil and gas development as requiring a far bigger footprint than it does or as a permanent alteration of an often pristine landscape.  It isn’t.  It is but a 20-30 year endeavor on relatively small locations, spread over a large territory and at the end of which remediation is mandated that will return the land to its natural state.  Furthermore, the footprint for oil and gas activity is minute compared to the solar and wind footprint, which are going to be far longer in duration than the 20-30 years for oil and natural gas.   Done correctly there is also no water impact, surface or subsurface, of oil and natural gas production.  Likewise claims about wildlife impacts of oil and natural development are frequently exaggerated.  Technology that limits the footprint of oil and natural gas production by use of directionally drilled wells lessens further all of the negative environmental impacts of oil and natural gas development.

So my bottom line is that Senator Salazar is a great choice.  My best wishes are with him as he takes on one of the toughest jobs in Washington, a job that is tougher for a Democrat centrist who is going to have to say “no” to a critical constituency more often than not if he’s going to do the job demanded of him.

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